What size wire does the water heater manual call for (or what current does the name plate specify)? 422.13 says water heaters smaller than 120 gal should be considered continuous load, so if your draw is 25A or more you need to use #8.
Your diagram only shows one hot going to the panel, but since you mention a double-pole breaker I assume you know that you'll actually have two hots (plus neutral and ground).
Yes, you will need a new circuit for a new water heater even a small one. I think water heaters are sized on the number of showers. That is the biggest factor.
120V means the type of voltage. When you say a new breaker your talking about handling load/amperage/available power to run your water heater. On your water heater is a label that says how much power the unit draws. In the national electrical code handbook is a section(s) that tells you what size breaker and wire is required depending on your current draw or required power, etc. Having the right voltage is only half the equation.
If that is an electric tankless then it requires 120 amps. That is not a misprint, 120 amps. Usually it means three double pole 40 amp breakers, six spaces in your panel. If you don't have a minimum of 200 amp serivce and the required breaker slots, then a service upgrade will be required.